In a press release, the Treasury Department and IRS have announced the designation of “Opportunity Zones” in 18 states. Opportunity Zones, investments in which can receive preferential tax treatment, were created under the Tax Cuts and Jobs Act (TCJA; P.L. 115-97; 12/22/2017) in order to spur investment in distressed communities throughout the country.
Background. Code Sec. 1400Z-1, as recently added by the TCJA, allows for the designation of certain low-income community population census tracts as qualified opportunity zones eligible for a number of favorable tax rules aimed at encouraging economic growth and investment to businesses within the zone. In general, a population census tract that is a low-income community is designated as a qualified opportunity zone if the chief executive officer of the State in which the tract is located timely nominates the tract for designation as such and notifies IRS in writing of the nomination, and IRS certifies the nomination and designates the tract as a qualified opportunity zone beyond the end of the “consideration period.” (Code Sec. 1400Z-1(b))
Code Sec. 1400Z-2 provides temporary deferral of inclusion in gross income for capital gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains from the sale or exchange of an investment in the qualified opportunity fund.
A qualified opportunity fund is, generally, an investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (other than another qualified opportunity fund) that holds at least 90% of its assets in qualified opportunity zone property.
Qualified opportunity zone property includes: any qualified opportunity zone stock, any qualified opportunity zone partnership interest, and any qualified opportunity zone business property.
States were required by March 21st to submit nominations or request a 30-day extension to submit nominations. Treasury has 30 days from the date of submission to designate the nominated zones.
Code Sec. 1400Z-1 was modified by the Bipartisan Budget Act of 2018 (P.L. 115-123, 2/9/2018) to a new subsection, Code Sec. 1400Z-1(b)(3), which provides a special rule for Puerto Rico under which every population census tract in Puerto Rico that is a low-income community is deemed to be certified and designated as a qualified opportunity zone, effective as of Dec. 22, 2017 (i.e., the date that the TCJA was enacted).
Designations announced. Treasury today has designated the nominations of all States that submitted by the March 21st deadline. Treasury will make future designations as submissions by the states that have requested an extension are received and certified.
Submissions were approved for: American Samoa; Arizona; California; Colorado; Georgia; Idaho; Kentucky; Michigan; Mississippi; Nebraska; New Jersey; Oklahoma; Puerto Rico; South Carolina; South Dakota; Vermont; Virgin Islands; and Wisconsin.
Qualified Opportunity Zones retain this designation for 10 years. Investors can defer tax on any prior gains until no later than Dec. 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund, an investment vehicle organized to make investments in Qualified Opportunity Zones. In addition, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be eligible for an increase in its basis equal to the fair market value of the investment on the date that it is sold.
Further guidance to be issued. Treasury and IRS plan to issue additional information on Qualified Opportunity Funds. The additional guidance will address the certification of Opportunity Funds, which are required to have at least 90% of fund assets invested in Opportunity Zones.
References: For qualified opportunity zones, see FTC 2d/FIN ¶I-8820. Treasury Press Release, “Treasury, IRS Announce First Round Of Opportunity Zones Designations for 18 States.”